R7 CPA Legal Liability

Question 1

In what three ways can a CPA legal liability arise?

Answer 1

• Breach of contract
• Commission of tort (negligence, fraud or constructive fraud)
• Violation of Statues (Section 11, Rule 10b-5 or tax law liability)

Question 2

To whom may a CPA be liable for negligently performing an engagement?

Answer 2

Under the majority rule, a CPA is labile to the client and any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work.

Under the minority Ultramares decision, a CPA can only be liable to the client and intended third parties shown to be in privity of contract with the CPA

Question 3

To whom may a CPA be liable for fraudulently performing and engagement or performing with gross negligence?

Answer 3

Anyone who relied on the CPA’s work and incurred damages as a result

Question 4

What are the defenses available to a CPA against a charge of negligence?

Answer 4

• No duty - remote plaintiff
• No breach - compliance with GAAS or GAAP
• No causal connection - knowledge

Question 5

State whether the plaintiff can revoker compensatory or punitive damages from a CPA in each of the following types of actions:

Answer 5

Breach of contract - compensatory
Ordinary negligence - compensatory
Fraud - compensatory and punitive
Constructive Fraud - compensatory and punitive

Question 6

What are the elements of Fraud?

Answer 6

M - Material misrepresentation
A - Actual and justifiable reliance in the misrepresentation
I - Intent to induce plaintiff’s reliance
D - Damages
S - Scienter (intent to deceived or reckless disregard of the truth)

Question 7

What is the difference between fraud and constructive fraud?

Answer 7

Under constructive fraud or gross negligence you do not need to prove a intent to deceive just acting recklessly (without regard for professional procedures or standards)

Question 8

Under what conditions may a CPA disclose confidential client information without the client’s consent?

Answer 8

• To defend against a lawsuit brought by the client (court proceeding)
• In response to a subpoena or summons
• As part of a review of a member’s professional practice (peer review)
• To a surviving member of the accountant’s firm